Today’s Blog – Monday 12th December 2016


The Blog returns from a few days away at the end of last week to find that on Thursday Santos (STO) announced various strategic changes that in some ways echo those from Origin Energy (ORG) that we commented on a few days earlier.

Both companies announced a separation of a basket of non-core assets into what the media has called a “Crapco” – with the intent in STO’s case of “sweating/exiting” and in ORG’s of IPOing (or in our view accepting a prior trade sale offer).

ORG’s NewCo could fairly be dubbed “MediocreCo” – it will find either a trade buyer (such as a Chinese sub-NOC – we don’t think any Australian companies would have the necessary combination of financial muscle and interest).  On the other hand, STO’s non-core business is more like a “ReallySh**Co” – its reasonable but late life production assets in Indonesia and Vietnam should rapidly attract offers from the likes of PE-cashed up entities – leaving it basically with a collection of abandonment liabilities and the political head-ache that is New South Wales CBM.  STO’s Crapco is un-IPOable.

For the smaller end of the Australian oil and gas industry, STO in particular has played a long term facilitating role of mopping up promising juniors, farming into acreage, etc.  The new STO seems less likely to do this (and Crapco will not have the intent or money) – and there are few if any alternatives.

Origin’s NewCo could grow into such a role if it is in fact IPOed.  The mid tier companies such as Beach Energy (BPT) are few in number and are arguably on the small side.  The industry is a healthier one if there is a chain of bigger and bigger fish to move assets from discovery to delineation to development – but that food chain has some big gaps in it.

From a political point of view, Federal and State politicians have had the luxury over the last few years of having STO own a large undeveloped gas (CBM) resource in New South Wales – which could be brought on line if necessary.  Putting these assets into Crapco reduces the political optionality over calling for their development – the free lunch of being able to hold endless moratoriums, investigations, etc, – while still having a large company own the asset – is arguably over.

Commodity prices

Crude prices finished up last week pretty much where they started, with Brent closing at US$54.33 and WTI at US$51.50.  All market eyes were on the non-OPEC/OPEC meeting in Vienna which was held over the weekend – and which appeared to deliver the required commitments to >500,000 bopd “reductions” from the likes of Russia, Mexico, etc.

This focus meant that some pretty dire “numbers” were largely ignored by the market.  The first came from the EIA’s weekly inventory report – a reduction in crude of 2.4 mmbbls overshadowed by a product build of 3.5 mmbbls of gasoline and 2.5 mmbbls of distillate (and for crude itself a large increase in the key location of Cushing).

Friday’s rig count numbers from BHI showed great (and swift) exuberance from the US oil patch post the OPEC meeting – a very large increase in oil rigs of 21 and gas rigs of 6.  If that continues – the oil price should quickly settle below US$50 – until the OPEC/Russia/etc cuts (if delivered) come through on the inventory number side.

Henry Hub was down 8% in the week – but to a still healthy US$3.72 – high enough to keep those rigs coming back.

LNG and international gas

A few snippets from around the LNG world late last week:

  • Petronas has produced first LNG from the world’s first large scale floating LNG (FLNG) venture – PFLNG Satu located offshore Malaysia.  Shell’s even larger Prelude FLNG project off Western Australia should follow in the next year or so.  However, whether these projects are white elephants that will not be much repeated remains to be seen – and will likely depend on factors such as the sustainability of low US and Canadian gas prices.
  • Repsol sold its ~3% stake in the Indonesian Tanguh LNG venture to operator BP for ~US$300M.  There’s value in them big fridges.
  • Gorgon LNG commenced domestic gas sales to WA State Government owned energy retailer Synergy.  It is unlikely such sales would have occurred without the State’s domestic gas reservation policy – but did this just displace other gas that would have come into the system anyway?

Governments, fracking, etc

The current volume of ill-informed comment about the broader Australian energy system is high – but of very low quality.

As noted before, there are lots of wind-farms in South Australia because – surprise, surprise – it is windy.

Infrastructure companies get the largest share of total consumer spend on energy – and are masters at manipulating Governments and regulators in maximising their share of this pie.  Because issues like WACCs are not very media-sexy – they manage to steal vast sums in broad daylight whilst all the squabbling is about the one third of retail prices that actually relates to energy production rather than delivery.

Quote of the day

The media yesterday reported the latest rumour about the possible next US Secretary of State – Exxon’s current CEO, Rex Tillerson – a proud recipient of Russia’s Order of Friendship.  That brought out the following quote from Republican Senator Lindsay Graham:

“Let’s put it this way: If you received an award from the Kremlin, order of friendship, then we’re gonna have some talkin’. We’ll have some questions.”




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